ARC Newsletter 7-13-12
Fireworks & Weather!
7/16/12
What a difference a month makes. We stated in the last newsletter that weather would have a major market impact the next month and did it ever! When the seasonal average benchmark finished on June 15th Dec 12 corn futures were at $5.06 and Nov 12 bean futures were at $13.14. Currently both are up $2.00+ searching for a level to match demand with downward supply adjustments due to the worst drought conditions since 1988. When the crop conditions report came out Monday afternoon it showed the corn and soybean crop at only 40% good/excellent which is the worst since 1988 when it was 16% on corn and 17% on soybeans, the 10 year averages at this time of the year should be 67% and 62% respectively. If we look back to 1988 for a reference, the market moved sharply higher from May to the first week of July and then tailed off the rest of the year as shown in the chart below.
In 1983 when we had wet spring and then dry weather the market started higher the first week of July and ran up until the middle of August. History is not always indicative of the future, but in those drought years the market digested the downward yield revisions and peaked a month to a month and a half after the rally began. The USDA significantly cut yield estimates on both corn and beans in Wednesday’s report, but the estimated demand was cut significantly as well. It is very possible that yield estimates continue to worsen without adequate rainfall going forward. The market is currently trying to find a price level that rations enough demand. Unfortunately, demand rationing sometimes leads to long-term demand destruction. The Agricultural Risk Consulting Group ● 8555 Executive Woods Dr ● Suite 400 ● Lincoln NE 68521 ● Toll Free 866-574-2724
We have had several conversations with clients discussing why we sold any bushels at all when the market has run up so high. A person has to step back and look at their marketing plan on June 15th when December corn closed at $5.06. The sales on part of insured bushels were above the market price and everybody wished they had sold more. There were plenty of fears of high acres, a slowing world economy, a faltering European Union, dropping energy prices, etc. Fast forwarding to today, the fact of the matter is that despite the earlier sales on a percentage of your bushels everyone is in a much better financial position today than they were a month ago. Looking at producers marketing plans, the expected gross dollars have jumped dramatically. Every bushel not sold yet is $2.00+ higher and that is always what we hope for when we make sales during the seasonal time frame. We are in the business of protecting profitable margins on your farm and reducing risk, not crystal ball predictions on market direction and weather forecasts. This will be the third year in a row of corn yields significantly below trendline. That is an anomaly and we feel a producer needs to evaluate 2013 price risk based on something closer to a trend-line figure. The question as always is what to do now. Emotions are running high and it is hard to sell when it looks like the sky is the limit but with a rally this strong the market gives you a great opportunity to finish out your incremental sales on your insured bushels that you are comfortable marketing. Dryland producers will have to communicate with us over the next couple months and make adjustments accordingly based on your yield expectations. If it remains dry and it appears a crop insurance claim is likely, we can work with you to help explain how that will fit in your overall risk management plan. For clients that did an increment on the JulyAugust Enhanced Averages it appears those will be selling right into the most volatile months during this weather market.
USDA Supply/Demand US Soybeans June 12July 10-11 July 11-12 13
USDA Supply/Demand US Corn
July 12-13
Acres Planted
77.4
75
73.9
76.1
Harvested
76.6
73.6
73
75.3
Yield Bu/ Acre
43.5
41.5
43.9
40.5
Beginning Stock
151
215
175
170
Production
3329
3056
3205
3050
Imports
14
15
15
15
Supply Total
3495
3286
3395
3235
Crushing
1648
1675
1645
1610
Exports
1501
1340
1485
1370
Seed
87
88
89
89
Residual
43
13
36
35
3280
3116
3255
3105
215
170
140
130
6.60%
5.50%
4.30%
4.20%
Use, Total Ending Stocks Stocks/ Use Ratio
July 10-11 Acres Planted Harvested Yield Bu/ Acre Beginning Stock Production Imports Supply Total Feed & Residual Food, Seed & Indsutry Ethanol for Fuel Domestic Total Total Exports Use, Total Ending Stocks Stocks/Use Ratio
July 11-12 June 12-13
July 1213
88.2 81.4
91.9 84
95.9 89.1
96.4 88.9
152.8
147.2
166
146
1708 12447 28
1128 12358 20
851 14790 15
903 12970 30
14182
13508
15656
13903
4793
4550
5450
4800
6428
6455
6425
6320
5021
5050
5000
4900
11220
11005
11875
11120
1835 13055
1600 12605
1900 13775
1600 12720
1128
903
1881
1183
8.60%
7.20%
13.70%
9.30%
The Agricultural Risk Consulting Group ● 8555 Executive Woods Dr ● Suite 400 ● Lincoln NE 68521 ● Toll Free 866-574-2724
Looking out to 2013, lets hypothetically assume that ethanol, feed/residual, and export demand get revised lower again for this year’s crop in tandem with high acres and a trend line yield. The market could stay at profitable levels or it could drift significantly below breakevens. Again, the question becomes what actions should be taken at this point? Diesel is down roughly 70 cents since March, nitrogen is roughly the same price as last year and Dec 13 corn had rallied to around $6.20. If breakevens are estimated from $4-5.00 that is an attractive level to start locking in profit margins. Give us a call and we can run a quote on heating oil options to get some diesel locked in. Then you can hedge/sell enough Dec 13 to again lock in some profitable margins on your farm.
In the current environment, very few end-users are running consistent profitable margins. It is highly possible that some end-users will run extremely thin on operating cash flow and potentially be forced into bankruptcy in the next year if prices remain high in order to ration demand. We strongly recommend managing your profit margins independently from end-users by using hedges or flexible hedge to arrives (HTAs). This not only reduces your financial exposure to end-users but also allows you the flexibility of various delivery points and potential strong basis appreciation that we have experienced in the past few years. We sincerely thank you for your business during these very volatile times and we wish you another prosperous year and more to come. Clinton Hoffman
Commodity Soybeans Corn KC Wheat Yearly Average to Date: Seasonal Average to Date:
Month Nov
Current Contract S X2
Dec
C Z2
Jul
KW N2
Current Futures Price $15.29
Yearly Average Price $12.63
Seasonal Average Price $13.05
Crop Insurance Guarantee $12.55
$7.32
$5.71
$5.58
$5.68
$8.37
$7.08
$6.86
$8.70
80%
priced
100%
priced
Seasonal Average: Feb 15 -Jun 15 average prices preceding harvest Yearly Average: 12 month price average preceding harvest (Sep-Aug) See AgMas @ http://www.farmdoc.uiuc.edu/agmas/index.asp
Trading commodity futures and options involves substantial risk of loss and may not be suitable for all investors. Past performance is not indicative of future results. Opinions are subject to change at any time, and are not a solicitation or recommendation to buy or sell commodity futures or commodity options. The information contained herein has been obtained from sources believed to be reliable.
The Agricultural Risk Consulting Group ● 8555 Executive Woods Dr ● Suite 400 ● Lincoln NE 68521 ● Toll Free 866-574-2724
7/16/12
What a difference a month makes. We stated in the last newsletter that weather would have a major market impact the next month and did it ever! When the seasonal average benchmark finished on June 15th Dec 12 corn futures were at $5.06 and Nov 12 bean futures were at $13.14. Currently both are up $2.00+ searching for a level to match demand with downward supply adjustments due to the worst drought conditions since 1988. When the crop conditions report came out Monday afternoon it showed the corn and soybean crop at only 40% good/excellent which is the worst since 1988 when it was 16% on corn and 17% on soybeans, the 10 year averages at this time of the year should be 67% and 62% respectively. If we look back to 1988 for a reference, the market moved sharply higher from May to the first week of July and then tailed off the rest of the year as shown in the chart below.
In 1983 when we had wet spring and then dry weather the market started higher the first week of July and ran up until the middle of August. History is not always indicative of the future, but in those drought years the market digested the downward yield revisions and peaked a month to a month and a half after the rally began. The USDA significantly cut yield estimates on both corn and beans in Wednesday’s report, but the estimated demand was cut significantly as well. It is very possible that yield estimates continue to worsen without adequate rainfall going forward. The market is currently trying to find a price level that rations enough demand. Unfortunately, demand rationing sometimes leads to long-term demand destruction. The Agricultural Risk Consulting Group ● 8555 Executive Woods Dr ● Suite 400 ● Lincoln NE 68521 ● Toll Free 866-574-2724
We have had several conversations with clients discussing why we sold any bushels at all when the market has run up so high. A person has to step back and look at their marketing plan on June 15th when December corn closed at $5.06. The sales on part of insured bushels were above the market price and everybody wished they had sold more. There were plenty of fears of high acres, a slowing world economy, a faltering European Union, dropping energy prices, etc. Fast forwarding to today, the fact of the matter is that despite the earlier sales on a percentage of your bushels everyone is in a much better financial position today than they were a month ago. Looking at producers marketing plans, the expected gross dollars have jumped dramatically. Every bushel not sold yet is $2.00+ higher and that is always what we hope for when we make sales during the seasonal time frame. We are in the business of protecting profitable margins on your farm and reducing risk, not crystal ball predictions on market direction and weather forecasts. This will be the third year in a row of corn yields significantly below trendline. That is an anomaly and we feel a producer needs to evaluate 2013 price risk based on something closer to a trend-line figure. The question as always is what to do now. Emotions are running high and it is hard to sell when it looks like the sky is the limit but with a rally this strong the market gives you a great opportunity to finish out your incremental sales on your insured bushels that you are comfortable marketing. Dryland producers will have to communicate with us over the next couple months and make adjustments accordingly based on your yield expectations. If it remains dry and it appears a crop insurance claim is likely, we can work with you to help explain how that will fit in your overall risk management plan. For clients that did an increment on the JulyAugust Enhanced Averages it appears those will be selling right into the most volatile months during this weather market.
USDA Supply/Demand US Soybeans June 12July 10-11 July 11-12 13
USDA Supply/Demand US Corn
July 12-13
Acres Planted
77.4
75
73.9
76.1
Harvested
76.6
73.6
73
75.3
Yield Bu/ Acre
43.5
41.5
43.9
40.5
Beginning Stock
151
215
175
170
Production
3329
3056
3205
3050
Imports
14
15
15
15
Supply Total
3495
3286
3395
3235
Crushing
1648
1675
1645
1610
Exports
1501
1340
1485
1370
Seed
87
88
89
89
Residual
43
13
36
35
3280
3116
3255
3105
215
170
140
130
6.60%
5.50%
4.30%
4.20%
Use, Total Ending Stocks Stocks/ Use Ratio
July 10-11 Acres Planted Harvested Yield Bu/ Acre Beginning Stock Production Imports Supply Total Feed & Residual Food, Seed & Indsutry Ethanol for Fuel Domestic Total Total Exports Use, Total Ending Stocks Stocks/Use Ratio
July 11-12 June 12-13
July 1213
88.2 81.4
91.9 84
95.9 89.1
96.4 88.9
152.8
147.2
166
146
1708 12447 28
1128 12358 20
851 14790 15
903 12970 30
14182
13508
15656
13903
4793
4550
5450
4800
6428
6455
6425
6320
5021
5050
5000
4900
11220
11005
11875
11120
1835 13055
1600 12605
1900 13775
1600 12720
1128
903
1881
1183
8.60%
7.20%
13.70%
9.30%
The Agricultural Risk Consulting Group ● 8555 Executive Woods Dr ● Suite 400 ● Lincoln NE 68521 ● Toll Free 866-574-2724
Looking out to 2013, lets hypothetically assume that ethanol, feed/residual, and export demand get revised lower again for this year’s crop in tandem with high acres and a trend line yield. The market could stay at profitable levels or it could drift significantly below breakevens. Again, the question becomes what actions should be taken at this point? Diesel is down roughly 70 cents since March, nitrogen is roughly the same price as last year and Dec 13 corn had rallied to around $6.20. If breakevens are estimated from $4-5.00 that is an attractive level to start locking in profit margins. Give us a call and we can run a quote on heating oil options to get some diesel locked in. Then you can hedge/sell enough Dec 13 to again lock in some profitable margins on your farm.
In the current environment, very few end-users are running consistent profitable margins. It is highly possible that some end-users will run extremely thin on operating cash flow and potentially be forced into bankruptcy in the next year if prices remain high in order to ration demand. We strongly recommend managing your profit margins independently from end-users by using hedges or flexible hedge to arrives (HTAs). This not only reduces your financial exposure to end-users but also allows you the flexibility of various delivery points and potential strong basis appreciation that we have experienced in the past few years. We sincerely thank you for your business during these very volatile times and we wish you another prosperous year and more to come. Clinton Hoffman
Commodity Soybeans Corn KC Wheat Yearly Average to Date: Seasonal Average to Date:
Month Nov
Current Contract S X2
Dec
C Z2
Jul
KW N2
Current Futures Price $15.29
Yearly Average Price $12.63
Seasonal Average Price $13.05
Crop Insurance Guarantee $12.55
$7.32
$5.71
$5.58
$5.68
$8.37
$7.08
$6.86
$8.70
80%
priced
100%
priced
Seasonal Average: Feb 15 -Jun 15 average prices preceding harvest Yearly Average: 12 month price average preceding harvest (Sep-Aug) See AgMas @ http://www.farmdoc.uiuc.edu/agmas/index.asp
Trading commodity futures and options involves substantial risk of loss and may not be suitable for all investors. Past performance is not indicative of future results. Opinions are subject to change at any time, and are not a solicitation or recommendation to buy or sell commodity futures or commodity options. The information contained herein has been obtained from sources believed to be reliable.
The Agricultural Risk Consulting Group ● 8555 Executive Woods Dr ● Suite 400 ● Lincoln NE 68521 ● Toll Free 866-574-2724
